Wildfire Risk Rising Worldwide, Lloyd's Warns

Jul 17, 2012

Citing recent wildfires in Colorado, Texas, Russia, Greece, and Chile and a report from climate scientists at the University of California, Berkeley and Texas Tech University, a top official at Lloyd’s said insurers face new challenges from wildfires in many parts of the world. According to Lloyd’s, the report predicts almost all of North America and most of Europe will experience more wildfires in coming years, mainly because of rising temperature trends.

“There is a growing body of evidence that points to more frequent and severe wildfires as a result of climate change,” said Neil J. Smith, manager of Emerging Risks & Research at Lloyd's. “A recent report from the Intergovernmental Panel on Climate Change found that drought, coupled with extreme heat and low humidity, can increase the risk of wildfire.” He said underwriters who still rely on traditional risk assessment and pricing methods based on past experience could under-price the risk.

“The basic insurance business model is [that] you diversify by writing different, uncorrelated risks, which allows you to take the occasional big loss," he said July 16. "But it appears climate change is creating a correlation between large risks, for example causing more frequent and intense storms and wildfires. That could have big implications on insurers’ capital.

“It is worrying,” he added, “that the areas at increased risk are often areas of population growth and economic development.”